Looking at 2016…

So as we pick at the remnants of Christmas and the year, what of 2016, now slouching into view. What, economically, will be the issues? Politically the key thing for Enda is that he and Michael D be taking the bows for 2016. That will allow them to remind everyone that the parties they represent were the ones that launched the state. Magnanimity and the electoral numbers may require a walk on role by Foreign Minister, Tainiste Michael Martin. Sinn Fein will sit in the back brooding that they would have gotten away with it but for those damned kids voters.

The big story will not be the election. It will happen but we know the broad outlines. All parties will engage in auction politics, while saying they are not. Fine Gael have introduced a, to me, dangerous element to this tradition. A tax cutting agenda in an economy which is, as I am blue in the face from demonstrating, is not a highly taxed one, that is auction politics of the basest kind. FG want to reduce taxes (apart from corporation ones, the local housing ones and the inheritance and capital ones of course) to US levels. Somehow this is, it seems, different ot extra spending and magically wont overheat a fast growing economy. Presumably they will also tell us the effect on services, which one imagines will also dive to US levels. Or, not. Fianna Fail will try desperately to make people forget their economic record, Labour will do the same on the (in comparative terms quite light) austerity front while hoping people remember their social one, and Sinn Fein will promise to do here what they don’t do there and vice versa while both growing the magic money tree and chopping it down to fuel the cooking of the chicken in every pot. The Alphabet Soup will sputter inchoate economic gibberish, various independents will campaign for cheap electricity without any new infrastructure with world class centres of medical excellence in every provincial town, Renua will ask us to please PLEASE think of the millionaires, and the Social Democrats will put forward mostly well though out policies which will get them nowhere much. So, while the economy will dominate the election economic logic may as well take an extended Xmas break

Meanwhile, the really big story will continue to unfold. Having boxed himself into a corner David Cameron wants someone, anyone, to help him out. Some sort of a deal will, probably, be cobbled together, the EU working on the “minimal thing at last moment” school of management, but will the rabidly xenophobic press in the UK accept it? Probably not. Anything short of a Trumpesque wall around the UK and the driving out of all foreigners (apart from maids, au pairs and the polish chauffeur) with whips would not satisfy the xenophobes and little Englanders who have driven the debate. Nobody quite knows what the effect on Ireland would be of a Brexit, but to imagine that it would be benign is, I think, wishful thinking on the highest level. Most “shure twill be grand” commentators assume a benign exit and a compliant EU. Most analyses show significant downside. That something benign may happen but we should all now be planning for a worst case scenario. This is a low probability but very high impact event and companies and the government need to plan in that light. So, hope for the UK to stay in Europe, plan for it to leave in acrimony.

Across the water, as it were, we will see a new US president. The spectacle of the Republican Party making a spectacle of themselves is at turns amusing and horrific. Gridlocked congresses and an increasingly rare bipartisanship will continue to make any meaningful economic changes in the USA remote. There is a mood afoot there of nativism, isolationism and xenophobia, fanned by the dangerous populism of Trump. These spirits, once invoked, are hard to control. From our local perspective the issue of what to do with offshore tax will remain high on the agenda. We should not underestimate the possibility of a populist call to “crackdown on tax shelters”, the first harbingers of which we have seen around (real or perceived) tax inversions. Ireland remains, 60 years on from Lemass and Whittaker, dependent on FDI, much of which is US based and at least some of which is tax related. Beyond that, the poisonous bloating of the national accounts from transfer pricing will continue to distort every aspect of the national debate on economics. So, expect the debate on tax to rumble on, and to devoutly wished away by every vested interest.

Globally the world economy will continue to stutter. China will continue to struggle to avoid a hard landing, and to counter its emergent demographic pressures. Demography is beginning to be a problem in other advanced economies such as Japan, but not so much in Germany with its openness to migrants. Hopefully Germany will find better way to integrate this wave faster than the Turkish gastarbiters. Merkel seems to have seen an opportunity to make a principled stand on this issue, and to her credit has driven forward an inclusive and integrationist agenda. The Eurozone will stagger on, always one step from tottering, but with the prevailing orthodoxy in place there is scant chance of a radical recovery. Global commodity prices and financial volatility will act as a drag on emerging economies some of which are in deep trouble – witness the downgrading of Brazil to junk. We are clearly at or near the bottom of the interest rate cycle. The only issue is when, not if, rates will rise, but rise they will at some stage. All of these act as warning signs to us, as we are a globally connected economy.

Much of our recent economic recovery has come from a combination of low interest rates and rapid US/UK recovery. With all of these in play, we need to take careful stock. Cutting tax in a rising economy makes little sense. Reformatting the tax base to sensible norms and paying down the debt/rebuilding a reserve would be in the long term be a sensible thing. But the long term in politics is “sometime next month” so don’t expect much sense in 2016